For almost all of modern economic history, policy makers have used those two tools — government spending or Fed interest rate cuts. That's it. But with this financial crisis, for the first time in U.S. history, those two tools won't work.

Enter quantitative easing, an idea the Fed is borrowing from Japan, which used it a decade ago when it had a similar problem.

It works like this.

A big bank — Bank of America, say — has $50 billion in government bonds. They'd sell those bonds if anyone would pay enough for them, but nobody is willing to pay that much. So the bank just holds on to them.

With quantitative easing, the Fed comes along and says, "Hey, Bank of America, we'll buy those bonds for a little more than anyone else is willing to pay." Bank of America says, "OK, great, send us the money."

This is where the Fed gets to use central-bank magic. They pay for that $50 billion purchase in new money. They just invent it. That's what the Fed — but nobody else — gets to do.

So now Bank of America has $50 billion they need to do something with. The Fed is hoping that Bank of America will decide to lend that $50 billion to companies and people to invest or spend. That stimulates the whole economy.

It sounds great. Create new money, get it out there, everyone wins. But — of course there's a but.

Nobody really knows if this works. It's still really controversial among economists. It's only been tried a few times and, as in the case of Japan, hasn't had the greatest results.

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